Traditional hedging methods have failed, Wall Street funds pouring into new "gambling tables": Mixed derivatives become the weapon to hedge inflation.

Notice that the violent fluctuations in oil prices since the outbreak of the Iran war have shaken the financial markets, prompting some large investors to try using complex derivatives to bet on the relative movements between different assets. The volatility of oil prices is particularly intense. On March 9, crude oil traded in a range of nearly $36 per barrel in a single day, setting the largest intraday volatility record in history. This volatility quickly spread to other markets such as stocks, bonds, gold, and foreign exchange. For ordinary investors, markets typically follow some predictable patterns. When economic risks rise, funds usually flow into so-called "safe-haven" assets such as government bonds or gold. But this pattern has recently been disrupted. While oil prices soared, some traditional defensive assets were also declining, leaving investors confused when seeking protection. Part of the reason for this is concerns about inflation. If shipping through the Strait of Hormuz continues to be disrupted, its impact will extend far beyond the oil sector. High energy costs will affect industries that rely on fuel or oil products, including plastics, fertilizers, metals, and natural gas. This possibility has sparked fears of "stagflation," a situation where economic growth slows down while prices continue to rise. To cope with these abnormal market fluctuations, some professional investors are turning to hybrid options, which are derivatives that link the performance of two or more assets. For example, a hybrid trade may only generate returns when "oil prices rise and stocks fall" or "interest rates rise and stocks fall." Antoine Bochiret, responsible for institutional derivatives architecture in Europe, the Middle East, and Africa at Citigroup, says trading activity for these strategies has surged amid escalating geopolitical tensions. Binary Double Options An increasingly popular structure is known as binary double options, sometimes also called binary digital options. In simple terms, this is an "all or nothing" bet: if both conditions are met (e.g. oil rises and stocks fall), the trade will pay a fixed return. If not met, investors lose the premium paid when entering the trade. Although critics argue that these trades are akin to gambling due to their binary nature, many professional investors use them to pursue specific returns while managing risks. The popularity of these strategies reflects a shift in market relationships during times of conflict. European stock markets are particularly sensitive to oil price increases. The Stoxx Europe 600 Index has recently shown one of the strongest negative correlations with crude oil prices in decades, meaning that when oil prices rise, stock markets often fall. Some derivative strategists say investors are now betting on both the positive and negative sides of this relationship. Early in the conflict, many traders expected a surge in oil prices to push down stock markets. Recently, some investors have begun to bet that the upward trend in oil prices may reverse. Banks are also recommending mixed strategies to clients. Barclays analysts suggest trades that profit from "falling stock markets and rising interest rates," while UBS strategists recommend combinations such as "falling stock markets and rising gold," a typical stagflation scenario. The increase in mixed trades is also evident in more traditional derivative markets. In oil options tied to Brent crude, large trades are showing extremely tight call spread combinations (a strategy that profits from price increases). Analysts believe that some of these trades may be related to hedging activities associated with hybrid options. Ultimately, the direction of these bets may depend on one question: will the Middle East conflict be quickly resolved or will it evolve into a prolonged crisis? If the tension is resolved quickly, many abnormal market relationships may quickly dissolve. But if the conflict drags on, investors may continue to use increasingly complex strategies to deal with turbulent markets.